Cost Segregation delivers results every time it's applied!

How cost segregation works for the commercial property owner…

Posted on March 09, 2012 by Jeff Hobbs

1) Modified Accelerated Cost Recovery System (MACRS) is the IRS-required method of depreciation for tangible personal property (§1245)* assets residing within real property (§1250) assets, and cost segregation is required in order to apply it properly which places the owner in IRC tax compliance.

2) §1245 assets are depreciated over 5-, 7- and 15-years while §1250 assets are depreciated over 39-years (aka Straight-Line Method {SL}). Cost segregation is required to differentiate the two.

3) When cost segregation is applied two things happen simultaneously…1) federal (and most often state) income taxes are reduced or temporarily eliminated, and 2) there is a commensurate increase in cash flow in one of two ways…a) income tax credits are issued, or b) income tax refund is obtained. Cost segregation delivers income tax refunds.

4) Due to the reduced “real” property value by the segregation of the “personal” property, real estate property taxes are reduced. Personal property is assessed at a lower rate, typically 10% to 50% lower, thereby reducing the overall property tax burden. (Use taxes are equally affected in states where they apply). Cost segregation facilitates lowering property taxes.

5) Coincidentally, property insurance assessments are based on “real” property values. Personal property is normally assessed at much lower rates under “contents” coverage and a corresponding reduction in premiums is realized due to cost segregation.

6) Due to the increased cash flow from all sources, it is customary to seek a reduction in “bank” rates with up to 100 basis points in play. Ask your financial professional for guidance in applying this benefit**.

7) If you currently own property that was purchased or built since January 1, 1987, your property qualifies for a cost segregation “look-back” study. In this instance all unearned depreciation is rolled into the current tax year which can mean a huge cash influx depending on your specific circumstances. Cost segregation works well in look-back studies.

*For example: carpet, decorative lighting, back-up systems, molding, cabinetry, landscaping, exterior signage, sidewalks/curb, wheel stops, parking lot, and fencing, just to name a very few.

**A lender may discount the rate, and/or points, if the income tax benefit is 5% to 15% of the purchase price. The average income tax benefit is 8% to 12%. An alternative bank offer is to require a lower down payment commensurate with the expected income tax benefit.

Take advantage of this cost segregation opportunity today. Contact us for a free, no obligation benchmark analysis that will detail what we can do for you.

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